It is commonplace for goods, tangible or intangible, to be sold or procured by auction or market mechanism. When goods are sold using methods in the art, they are generally either sold one at a time or with like goods sold together. For example, in auctions at traditional auction houses such as Sotheby's or Christies—or in Internet auctions such as eBay—goods are generally sold one at a time in ascending-bid auctions. In auctions such as the U.S. Treasury bond auctions, multiple identical objects (bonds with identical interest payments and maturity dates) are auctioned together in sealed-bid auctions. In auctions such as the Federal Communications Commission's spectrum auctions, telecommunications licenses covering nearby frequencies and covering various regions of the U.S. are auctioned together in ascending-bid auctions. Similarly, when goods are procured using methods in the art, they are generally either procured one at a time or with like goods procured together.
However, standard auction or other market procedures for selling or procuring goods may encounter severe difficulties when there are complementary goods located outside of the auction or market mechanism. Good A and good B are said to be complements when they are most usefully consumed or produced together.
A severe example of complements, which motivates much of the following discussion, is created when a government sells licenses for encumbered telecommunications spectrum. For example, at this writing, the Federal Communications Commission (FCC) is planning to sell new communications licenses in the 700 MHz band in FCC Auction No. 31, currently scheduled for March 2001. Because of its location in the electromagnetic spectrum and its excellent propagation characteristics, the 700 MHz band is ideally suited for next generation (3G) mobile or high-speed broadband telecommunications services. Once deployed, these services will intensify competition for all communication services and yield tremendous benefit to the public. However, the 700 MHz band is the same spectrum currently allocated to UHF television channels 59-69, and some 100 television stations nationally currently operate in this band. Moreover, the current UHF television stations maintain the right to continue to broadcast on this frequency without interference until the end of the digital television (DTV) transition, currently scheduled to extend six or more years beyond the auction date for the new licenses.
This presents a fundamental economic problem. A buyer wishing to provide a new wireless service in the 700 MHz band needs two things: a new license from the FCC; and agreement from incumbent broadcasters in this band to clear the spectrum. The license and the clearing agreements are strong complements; each is of limited usefulness without the other. One can think of the license as a left shoe and the clearing agreements as a right shoe. What a buyer needs is a pair of shoes. The problem is that the government is only auctioning (and, indeed, only owns) left shoes; the right shoes are owned by many different broadcasters. An auction for left shoes by themselves is likely to attract little interest unless the winning bidders can be confident that they will also be able to acquire the corresponding right shoes.
Thus, if the new FCC licenses for the 700 MHz band are sold—as currently planned—in an auction that does not include agreements to clear, severe difficulties can be expected. Bidders in the FCC auction can anticipate that the obtaining of clearing agreements after the auction will be exceedingly costly, as the incumbent broadcasters will be in excellent bargaining positions to extract very high prices from the winners of the new FCC licenses. Moreover, failures in the bargaining process will likely result in many of the encumbrance issues not being resolved for many years, leading to vast underutilization of the spectrum. Understanding this, bidders in the FCC auction are likely to bid very low prices, so the federal government (and taxpayers) will likely receive vastly diminished auction revenues.